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Update on the New Prospectus Regulation

Update on the New Prospectus Regulation

  • United Kingdom
  • Capital market law

04-09-2018

Background

The new Prospectus Regulation came into force on 20 July 2017 and is similar to the current Prospectus Directive (2003/71/EC) but there are some relaxations to the regime which will be helpful to traded companies and whilst the majority of the provisions of the new Regulation will not apply until 21 July 2019, this Summer has seen some changes take effect. The changes are part of the European Commission’s proposal to create a single market for capital across all member states of the EU, and provide simpler and more cost effective access to capital markets, particularly for SMEs.

Under the current regime, unless an exemption applies, there is a requirement to publish a prospectus when either:

  • an offer of securities is made to the public; or
  • securities are admitted to trading on a regulated market (such as the main market of the London Stock Exchange; but AIM is not a regulated market).

The new Regulation does not change this principle.

What has changed recently?

Most recently, there have been changes as regards the requirement to produce a prospectus when there is an offer to the public.

From 21 July 2018 the following provisions of the new Regulation took effect:

  • Article 1(3) provides that an offer of securities to the public with a total value of less that EUR 1 million, calculated over a 12 month period, is exempt from the regime entirely; and
  • Article 3(2) allows Member States to exempt an offer of securities to the public in an amount up to EUR 8 million from the obligation to publish a prospectus. Offers relying on this exemption cannot benefit from the passporting regime and nor does this exempt companies making an application for trading onto a regulated market.

The prospectus regime in the UK was amended by the Financial Services and Markets Act 2000 (Prospectus and Markets in Financial Instruments) Regulations 2018 to reflect:

  • Article 1(3) – removal from the regime entirely at the lower threshold of EUR 1 million (down from EUR 5 million); and
  • Article 3(2) –an exemption for offers to the public of up to EUR 8 million where there is no application to trading on a regulated market.

In the UK this increase in the threshold for exempt offers to the public to EUR 8 million will therefore assist AIM companies who wish to undertake retail offers, and also unquoted companies looking to raise money by crowd funding.

What other provisions are already in force?

In July 2017, there was a change in certain exemptions regarding admission to trading on a regulated market.

Under the Prospectus Directive, there was no requirement to publish a prospectus for the admission to trading on a regulated market of shares representing less than 10% of the number of shares of the same class already admitted to trading on the same market. Under the new Regulation, with effect from 20 July 2017, this exemption was extended to apply to 20% of the number of securities (i.e. both equity and non-equity) fungible with securities already admitted to trading on the same regulated market over a period of 12 months.

This change means that main market companies issuing their shares as consideration in larger acquisitions will only require a prospectus if the consideration shares take the company up to or over the 20% limit. Whilst it would also be possible for main market issuers to carry out larger placings, without a prospectus, they would need to bear in mind the pre-emption guidelines issued by the Pre-Emption Group. The pre-emption guidelines broadly approve the issue of 5% of issued ordinary share capital in any one year, plus no more than an additional 5% in connection with an acquisition or specified capital investment. The pre-Emption Group confirmed in a press release that their Statement of Principles continues to apply notwithstanding the increase to 20% under the new Prospectus Regulation.

The Prospectus Directive allowed shares resulting from the conversion or exchange of other securities to be admitted to trading on the same regulated market without a prospectus. Under the new Regulation, following the changes that took effect in July 2017, the resulting shares must represent, over a period of 12 months, less than 20% of shares of the same class admitted to trading.

Other key exemptions

Otherwise, the exemptions under the current regime will continue to apply until the remaining provisions of the new Regulation take effect on 21 July 2019. At that point, the Prospectus Directive and the current UK Prospectus Regulation will both fall away. Although the remaining provisions take effect on 21 July 2019, by which time we will are likely to either be outside the EU or in a transition period, we expect that the UK will put in place rules that are equivalent to the new Regulation.

From 21 July 2019, for offers to the public, Article 1(4) of the new Regulation will continue to provide exemptions for offers of securities solely to qualified investors, and to less than 150 persons per Member State (other than qualified investors).

As regards exemptions applicable to the admission to trading on a regulated market, as noted, certain exemptions took effect from 20 July 2017. From 21 July 2019, it will not be possible to combine these two exemptions if such combination could lead to the admission to trading of more than 20% of the number of shares of the same class already admitted to trading on the same regulated market over a period of 12 months. This is a new restriction.

The exemptions that apply to employee offers and in the case of a takeover or merger or division will continue to apply in the case of both an offer to the public and admission to trading on a regulated market, but the scope of both exemptions have been simplified.

What else is changing?

Looking further ahead, the new Regulation will implement certain structural changes from 21 July 2019, intended to simplify the production of a prospectus, including:

  • The “elements” approach to the summary under the current regime will change, and the structure and contents will be less rigidly prescribed. There will be a maximum length for the summary (7 sides of A4 paper).
  • It will be possible for frequent issuers to draw up a shelf registration document, known as a universal registration document (URD). A URD will constitute the registration document part of the prospectus (so only the securities note and summary will then need to be drawn up), and may be drawn up every year. Once approved for 2 consecutive financial years, subsequent URDs may be filed with the FCA without prior approval, provided that a URD is filed each financial year. Users of URDs will also be able to benefit from a fast track prospectus approval process with the FCA.
  • There will be a simplified disclosure regime for secondary issues, available to issuers whose securities have been admitted to trading on a regulated market or an SME growth market (which includes AIM) for 18 months.
  • A less onerous regime for SMEs and other issuers who meet the criteria, who will be able to take advantage of the new EU growth prospectus. This will have a standardised format and reduced disclosure requirements.  The EU growth prospectus will not be available for admission to trading on a regulated market.
  • There will be some changes to risk factors under the new regime. The focus will be on limiting risk factors so that they are specific to the issuer and the securities.

Useful Links

New Prospectus Regulation

Financial Services and Markets Act 2000 (Prospectus and Markets in Financial Instruments) Regulations 2018

 

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